Shareholders’
equity
An intrinsic part of the Qualifying Exam
Corporation
Definition
A Corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes and properties, expressly
authorized by law or incident to its existence.
How it is being organized.
Corporation Code provides that any person,
partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in
number, may organize a corporation for any lawful
purpose or purposes: filing with the SEC the articles of
incorporation duly executed before a notary public,
setting forth the following:
By-laws
It is defined as the rules of action adopted by the
corporation for its internal government and for the
government of its officers, shareholders, or numbers.
Pre-incorporation subscription requirement
The Revised Code does away with the minimum
capital stock requirement for stock corporations,
except as otherwise specifically provided by special
law.
Components
Corporators
Those who compose the corporation whether
shareholder or member or both.
Incorporators
Those corporators mentioned in the Articles of
Incorporation.
Shareholders
Owners of shares in a stock corporation.
Members
Corporators of a nonstock corporation.
Books and records
Minutes Book
Stock and transfer book
Books of accounts
Subscriptions book
Shareholder’s Ledger
Subscribers Ledger
Share Certificate Book
Organization costs
Legal Fees, Incorporation Fees, share issuance
costs, accounting and legal fees and etc.
TREATMENT?
- Expensed immediately.
Advantages
1. Has a legal capacity to act and contract as a
distinct unit in its own name.
2. Continuity of existence
3. Its credit is strengthened by its continuity of
existence.
4. Management is centralized by the BOD.
5. Creation, organization, management and
dissolution are standardized.
6. Makes feasible gigantic financial undertakings.
7. Shareholders have limited liability.
8. Shareholders are not general agents of the
business.
9. Shares can be distributed without the consent of
other stockholders.
Disadvantages
1. Relatively complicated in formation and
management.
2. Entails high cost of formation and operations.
3. Its credit is weakened by the limited liability of
shareholders.
4. Ordinarily lacks personal element in
transferability of shares.
5. High government control.
6. Management and control are separated from
ownership.
7. Stockholder’s voting rights have become
theoretical.
8. Stockholder’s have little voice in the conduct of
the business.
Classifications
A. Generally
1. Stock Corporation
2. Nonstock Corporation
B. As to Number of persons who compose them
1. Corporation Aggregate
2. Corporation Sole
C. For Religious purposes or not
1. Ecclesiastical Corporation
2. Lay Corporation
D. For Charitable purposes or not
1. Eleemosynary Corporation
2. Civil Corporation
E. As to State (Creation)
1. Domestic Corporation
2. Foreign Corporation
Classifications
F. Legal right to Corporate existence
1. De Jure Corporation
2. De Facto Corporation
G. Open to the public or not
1. Close Corporation
2. Open Corporation
H. Relation to another corporation
1. Parent/Holding Corporation
2. Subsidiary Corporation
3. Affiliated Corporation
I. Public or Private
1. Public Corporation
2. Private Corporation (Government-owned, Quasi-
public)
J. True or Limited Sense
1. True Corporation
2. Quasi Corporation
Shareholder’s equity
Capital Stock or Share Capital
portion of the paid in capital representing the total
par or stated value of the shares issued
Subscribed Share Capital
portion of the authorized share capital that has
been subscribed but not yet fully paid and therefore
still unissued
Additional Paid In Capital or Share Premium
Excess over par or stated value
Resale of treasury shares at more than cost
Donated capital
Issuance of share warrants
Distribution of stock dividends
Quasi-reorganization and recapitalization
Shareholder’s equity
Retained Earnings
represent the cumulative balance of the periodic
earnings, dividend distributions, fundamental errors
and other capital adjustments
Revaluation Surplus
excess of revalued amount over the carrying
amount of the revalued asset
Treasury Shares
corporation’s own shares that have been issued
and then reacquired but not canceled. Shown as a
deduction in the total Shareholder’s Equity.
Other concerns before the problem solving part
Capital stock
Rights of a shareholder
Par vs. No Par Shares
Ordinary Share Capital
Preference Share Capital
Legal Capital
Trust Fund Doctrine
Exercise #1
The Shareholder’s equity section of Batch
Competitive revealed the following information
OS Cap, 20 par 6,000,000
OS Premium 7,000,000
PS Cap, 6par 36,000
PS Premium 120,000
Retained Earnings 50,000
Subs Receivable OS 1,500,000
Subs OS Cap 20,000
What is the amount of legal capital?
6,056,000
Problem solving
The more important part to learn and MASTER.
Accounting for share capital
Memorandum Method
Journal entry Method
A. The entity was authorized to issue share capital as
follows:
Preference Share Capital, P100 par, 30,000 shares
Ordinary Share Capital, P50 par, 100,000 shares
Memo Method:
MEMO ENTRY
The entity was authorized to issue preference share capital of
3,000,000 divided into 30,000 shares withy par value of P100.
The entity was authorized to issue ordinary share capital of
5,000,000 divided into 100,000 shares withy par value of P50.
Journal Entry Method:
Unissued PS Capital 3,000,000
Authorized PS Capital 3,000,000
Unissued OS Capital 5,000,000
Authorized OS Capital 5,000,000
B. 40,000 ordinary shares were issued for cash at P60
per share.
Memo Method:
Cash 2,400,000
OS Capital 2,000,000
Share Premium OS 400,000
Journal Entry Method:
Cash 2,400,000
Unissued OS Cap 2,000,000
Share Premium OS 400,000
c. 10,000 preference shares were issued at P120 for
cash.
Memo Method:
Cash 1,200,000
Pref Share Cap 1,000,000
Share Premium PS 200,000
Journal Entry Method:
Cash 1,200,000
Unissued PS Cap 1,000,000
Share Premium PS 200,000
d. 10,000 preference shares were subscribed at par
value.
Memo Method:
Subs Rec. PS 1,000,000
Subs share Cap PS 1,000,000
• Subscription Receivable
• Subscribed Share Capital
Journal Entry Method:
Subs Rec. PS 1,000,000
Subs share Cap PS 1,000,000
e. P400,000 were received on the above subscription to
preference shares.
Memo Method:
Cash 400,000
Subs Rec PS 400,000
Journal Entry Method:
Cash 400,000
Subs Rec PS 400,000
Non cash consideration?
Accordingly, if share capital is issued for noncash
consideration such as tangible property, intangible
property and services, the share capital is recorded
at an amount equal to the following in the order of
priority:
1. Fair value of the noncash consideration given
2. Fair value of the shares issued
3. Par value of the shares issued
Noncash considerations
Illustration:
An entity issued 10,000 OS of P100 par in
exchange for land with a FV of P1,500,000. The FV of
the shares issued is P180 per share.
If FV of land is used?
If FV of shares?
Par value of shares?
f. 1,000 preference shares were issued in payment of
legal fees of 100,000 in connection with organizing the
corporation.
Memo Method:
Legal Expenses 100,000
Pref Share Cap 100,000
Journal Entry Method:
Legal Expenses 100,000
Unissued PS Cap 100,000
g. 20,000 ordinary shares were issued for property, plant
and equipment which had a fair value of 1,300,000.
Memo Method:
PPE 1,300,000
OS Capital 1,000,000
Share Prem OS 300,000
Journal Entry Method:
PPE 1,300,000
Unissued OS Cap 1,000,000
Share Prem OS 300,000
h. 15,000 ordinary shares were subscribed for at par.
Memo Method:
Subs Rec OS 750,000
Subs OS Cap 750,000
Journal Entry Method:
Subs Rec OS 750,000
Subs OS Cap 750,000
i. 40% of the ordinary share capital subscription was
collected.
Memo Method:
Cash 300,000
Subs Rec OS 300,000
Journal Entry Method:
Cash 300,000
Subs Rec OS 300,000
j. The balance owing on the subscription described in D
and E was collected, and the preference shares were
issued.
Memo Method:
Cash 600,000
Subs Rec PS 600,000
Subs Share Cap 1,000,000
PS Cap 1,000,000
Journal Entry Method:
Cash 600,000
Subs Rec PS 600,000
Subs Share Cap 1,000,000
Unissued PS Cap 1,000,000
Delinquent subscriptions?
Highest bidders are those who are willing to pay the
offer price of the delinquent shares for the smallest
number of shares.
Offer price: Balance due, interest accrued, expenses
and etc.
What if there is no bidder?
Delinquent subscriptions
X subscribes for 10,000 shares at par P100 paying
P600,000.
The subscription balance is called and X defaults.
The corporation pays P30,000 for expenses
incurred in connection with the auction for
delinquent shares.
A: 4500 shares; B: 5000 shares; C: 6000 shares
The highest bidder pays the balance plus interest of
20,000 plus the delinquency expense of 30,000.
Corporation issues shares to A and X respectively.
What if there are no bidders?
Convertible preference shares
Illustration:
PS Cap, 20,000, P200 par 4,000,000
OS Cap, 200,000, P60 par 12,000,000
Share Prem – PS 800,000
Share Prem – OS 300,000
Retained Earnings 5,000,000
CASE 1: 1 PS for every 3 OS
CASE 2: 1 PS for every 6 OS
Accounting for treasury shares?
3 requisites to qualify as treasury shares:
Shares must be the entity’s own shares
Shares must have been issued originally
Shares are reacquired but not canceled
Legal limits:
No corporation shall redeem, purchase or reacquire its own shares of whatever
class, unless it has adequate amount of unrestricted retained earnings.
Method:
Cost method vs Par Value Method
If acquired for noncash considerations, cost is measured by the carrying amount of
the noncash asset surrendered.
Reissuance of Treasury shares
An entity acquired 3,000 shares with a par value of
P150 at P200.
CASE 1: Reissuance at Cost
CASE 2: Reissuance at Above Cost. (reissued at
P250)
CASE 3: Reissuance at Below Cost (reissued at
P100)
CASE 4: Additional Info:
Share Premium – TS 20,000
Share Premium – Orig issuance 300,000
Reissued at below cost (reissued at P100)
Retirement of Treasury shares
Share capital account is always debited at
par/state value
If there is a resulting gain, credit to Share Prem –
TS account
Share Cap xx
TS xx
SP – TS xx
If there is a loss, such loss is debited in the
following order:
Share Premium from original issuance
Share Premium from Treasury Shares
Retained Earnings
Share Cap xx
Share Prem OI xx
Share Prem – TS xx
Retained Earnings xx
TS xx
Exercise #2
In 2012, MAKURI Company issued 50,000 shares
of P10 par value for P100 per share. In 2013,
MAKURI acquired 2,000 of its shares at P150 and
immediately canceled these 2,000 shares.
What amount of Share Premium and Retained
Earnings
should be debited?
Share Cap 20,000
Share Prem OI 180,000
Retained Earnings 100,000
TS 300,000
k. Acquired 5,000 ordinary shares at 40 per share to be
held as treasury.
Memo Method:
Treasury Shares 200,000
Cash 200,000
Journal Entry Method:
Treasury Shares 200,000
Cash 200,000
l. Closed net income of 2,000,000 to retained earnings.
Memo Method:
I/S 2,000,000
Retained Earnings 2,000,000
Journal Entry Method:
I/S 2,000,000
Retained Earnings 2,000,000
TOTAL SHAREHOLDER’s EQUITY
Preference Share Cap 2,100,000
Share Premium – PS 200,000
Ordinary Share Cap 3,000,000
Share Premium – OS 700,000
Subscribed Share Cap – OS 750,000
Subscription Receivable (450,000)
Treasury Shares (at cost) (200,000)
Retained Earnings 2,000,000
TOTAL SHAREHOLDER’S EQUITY 8,100,000
Issued Shares :PS – 21,000; OS – 60,000
Total Outstanding Shares :76,000
Shareholder’s equity
Shareholder’s Equity- January 6,350,000
Retirement of PS
Purchase of TS (60,000)
Share Split ---
Reissuance of TS 16,000
Net Income 300,000
TOTAL SHAREHOLDER’S EQUITY 6,606,000
EXERCISE #3: Shareholder’s equity
Last year, the company issued P15 per share one
half of the 950,000 authorized ordinary shares of
P1 par value. The company has 500,000 authorized
preference shares of P5 par value, has net income
of 1,025,000 and has declared a P230,000
dividend.
This year, the company issued 100,000 OS for P17
per share; issued 150,000 PS for P8 per share;
restricted retained earnings of 300,000 for a
machine purchase; issued another 50,000 PS for
P9 per share; declared a 2-for-1 share split;
reported net income of 1,215,000 and declared at
year-end a dividend of 635,000 to shareholders of
record on the following month to be paid two
months later.
11,850,000
